Can A Minor Invest In A Mutual Fund? All You Need To Know About It!

Can A Minor Invest In A Mutual Fund

Whenever it comes to investing in mutual funds we always consider a person who is in their 30s or 40s looking forward to growing their wealth. But nowadays, investment is becoming a common topic among the kids as well. Have you ever thought of investing in a mutual fund when you were 16? But today’s children are considering it, kudos to them! 

If your question is, can a minor start investing in a mutual fund? The answer will always be yes. But always remember, whenever it is about investing money, certain regulations and responsibilities come in. Being a teenager, if you are curious about money management or being a parent, if you are thinking ahead for your kid’s future, then you are on the correct page. Here in this blog, we will be covering everything regarding a minor’s investment in a mutual fund, so let’s get started. 

First Of All, Who’s A Minor?

Before you know everything about a minor’s investment you should know who a minor is. In India and also in many countries anybody below the age of 18 is legally considered as a minor. Technically, they cannot enter into any kind of legal contract that includes buying or selling any kind of financial instruments. But that doesn’t mean they cannot do any investment, they just need their parents or legal guardians to do it for them. 

Can A Minor Start Investing in a Mutual Fund? 

As we have already mentioned, a minor can invest in a mutual fund, but they need their parents’ consent. The guardian applies for the investment on behalf of their minor, and all the transactions will be done in the name of that minor. Until the child becomes 18 they will be under the supervision of their guardian. So, when you open your demat account, there will be some special formalities. 

What’s The Process? 

There are a few steps a minor and their guardian must follow before initiating any kind of interest. The process is,

• Select Guardian

To start investing in a mutual fund, a minor can choose only one guardian to be associated with their MF account. This guardian can be a mother or a father, otherwise someone who is a court-appointed legal guardian. 

• Complete The KYC

KYC is a very essential part for minors and also for the guardian. To complete this, some documents are required, such as, 

1. Guardian PAN card and address proof. 
2. A photograph of a minor and the guardian. 
3. Minor’s PAN card. 
4. A minor’s passport or birth certificate as proof of age and relationship. 

• Open The MF Folio 

Once the entire KYC process is completed now a mutual fund folio can be easily opened in the name of the minor. After the folio is created, the investment will be held in the minor’s name, but the transactions will be executed by the guardian. 

• Choosing MF

There is no such restriction for choosing any Mutual Fund, hybrid funds, debt funds, or equity funds; all are open for minors. The parents are the guardians who need to make decisions informedly that suit their long-term goals for the child. (Please feel free to reach out in case you also want to invest for your child)

• Mode of Investment

Just like the adults, minors also have two options for investment mode, one is lump-sum investment, which is a large amount of investment at one time, and the other is SIP investment, which is a monthly contribution. For the minor’s purpose, the SIP is considered to be the best option as it helps in building wealth gradually. 

Reasons To Choose Investing In Mutual Funds For A Minor

1. With the help of the power of compounding, a small investment that is made in the early stage can grow significantly over a long period. When you start investing from a young age, it gives you a major financial advantage. 
2. Being a parent, if you are investing in a mutual fund for your kid, he/she will learn the discipline of financial management. As they grow, they start to understand how their investment is working there for it becomes one of the finest ways to teach them about long-term planning, money, and responsibility. 
3. Another reason why the parent chooses images for their minor is because of their dream entrepreneurial venture, education, and marriage. 

Rule To Keep In Mind 

• Taxation If The Minor Holds MF

 Any income arising from the investments made in a minor child’s name is added to the parent’s taxable income if the source of funds was the parent. However, when he turns 18, the income from his investments will be taxable in the hands of the minor. 

• Redemption 

The redemption proceeds will be credited to the minor’s bank account, which is linked to his investment account.  

• Joint Holding 

There is no option available for joint holders for the minor’s account. The execution of the investment is solely in the name of a minor. 

• Requirement Of Bank Account 

It ensures the transparency of funds flow to the bank account, which is linked to the investment must be in the name of a minor. 

• Procedure To Transfer Holding When The Minor Turns Major

 When a minor becomes a major, he/she must submit a special application and the required documents to change the status from minor to major.

In this situation, guardians will not be allowed to take any financial or non-financial transactions from the date the minor attains majority.

In simple words, the minor’s account will be frozen for any kind of operation by the guardian on the day the minor attains the age of majority, and no further activities can be done until the status is changed.

Mistakes To Avoid

1. People generally forget to update the account when the minor dances 18. When you do so, it leads to unnecessary delay to have accessing the fund. 
2. Always remember that these kinds of investments are made for long-term goals like education, marriage, and others. So, staying conservative will be ideal unless you have experience as an investor. 
3. Many people use the guardian’s bank account rather than the minor’s; it causes compliance issues. 
4. Always try to consult with an advisor who can help you understand how the gain from a minor’s investments affects your tax return. 

Also, Check – Mutual Funds vs Fixed Deposits

In Summary 

Most people are unaware of investing in mutual funds for minors, but you can consider it as one of the smartest ways to build a strong future for your kids. We, the Indians, often forget to teach our kids about the value of money, the rewards of planning, and the power of patience. Investing in a minor’s name in the mutual fund can serve you all the mentioned benefits. So if someone is saying kids do not need to worry about investing, you know what to answer! 

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Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.